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Competitive intelligence for bankers

February/MARCH 2017

Banks take page from fintechs— embrace collaboration, rapid change



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How to partner with a fintech Preview of fair lending’s next act 1

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/Contents February/March 2017

16 Agile Banking More than a buzz word, “agility” applies to both strategy and crossorganizational action. It is key to bank relevance By John Ginovsky, contributing editor Cover image: Shutterstock

22 Collaboration, not competition Fintechs’ “We will rock you” morphs into “We need you” By Lisa Joyce Valentine, senior contributing editor

February/March 2017



/ contents / 4 On the Web

February/March 2017, Vol. 3, No. 1 Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Email: Web: Twitter: @BankingExchange LinkedIn: banking-exchange

Meet “The Prairie Economist”; Three Mistakes bankers make; Check out “Weekend Think”

6 Like it or Not Wakeup call for bankers and America

8 Threads Partnering for car loans; Still “too small to survive”?; Banking the “gig economy”; “The Great Loan Gap”


8 13 Seven Questions

Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email: Chairman & President Arthur J. McGinnis, Jr. Editor & Publisher William Streeter

After nearly 50 years as a banking lawyer, Walt Moeling can still be surprised

Executive Editor & Digital Content Manager Steve Cocheo

26 Risk Adjusted

Creative Director Wendy Williams

Where risk management and sales management intersect, danger lurks

Art Director Nicole Cassano

28 Bank Tech

Graphic Designer Aleza Leinwand

With Zelle, banks are poised to reclaim person-to-person payment leadership

Editorial & Sales Associate Andrea Rovira Contributing Editors Ashley Bray, John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Lucy Griffin, Mike Moebs, Ed O’Leary, Melanie Scarborough, Lisa Joyce Valentine

30 Compliance Watch Fair lending’s next act is about to begin

Director, National Sales Robert Vitriol

33 Idea Exchange Community banks help local currency demonstrate sustainable economy

Production Director Mary Conyers

35 Industry Resources

Circulation Director Maureen Cooney

White papers, webinars & more

36 Counterintuitive


Notion that fintechs run circles around bank IT is way overdone Banking Exchange (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published February/March, April/May, June/July, August/September, October/November, December/January by Simmons-Boardman Publishing Corp., 55 Broad Street, 26th Floor, New York, NY 10004 Pricing Qualified individuals in the banking industry may request a free subscription. Non-qualified subscription printed or digital version: 1 year, financial institutions $67; other business $93; foreign $508. 2 year, financial institutions $114; other business $155; foreign $950. Single Copies are $35 each. Subscriptions must be paid for in U.S. funds. Copyright © Simmons-Boardman Publishing Corporation 2017. All rights reserved. Content may not be reproduced without permission. Reprints For reprint information Contact: Mary Conyers, (212) 620-7250, For Subscriptions & Address Changes Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: Write to: Banking Exchange, PO Box 3135, Northbrook IL 60062-2620 Postmaster Send address changes to Banking Exchange, PO Box 3135, Northbrook IL 60062-2620 2


February/March 2017

Marketing Manager Erica Hayes Editorial Advisory Board Jo Ann Barefoot, Jo Ann Barefoot Group, LLC Ken Burgess, FirstCapital Bank of Texas, N.A. Steve Ellis, Wells Fargo & Co, Mark Erhardt, Fifth Third Bank, Joshua Guttau, TS Bank Jane Haskin, First Bethany Bank Brian Higgins, First Financial Bank Trey Maust, Lewis & Clark Bank Earl McVicker, Central Bank and Trust Co. Chris Nichols, CenterState Bank of Florida, N.A. Dan O’Malley, Eastern Bank Dan Soto, Ally Bank Dominic Venturo, U.S. Bank McCall Wilson, Bank of Fayette County

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/ ON THE WEB / Popular stories on

Following “The Prairie Economist” yet?

Three common mistakes banks make

Blockchain’s still waiting for its web

New blogger Mike Moebs brings the eye of a skeptic to community bank management. He questions assumptions of what works in pricing and product design. You will always find challenges to what you know. Read more at

You may keep up with today’s pace of change, but do you draw the wrong conclusions … and act on them? Celent’s Bob Meara cites three ways banks err, such as failing to appreciate the half-life of facts. Read more at

“The blockchain landscape is still very technical. ... it is hardly comprehensible to the masses, and it will continue to be that way, unless it breaks out of its technical shell.” So says blockchain blogger William Mougayar. Read more at









Weekend Think: Matters that call for reflection What issues lie ahead that you should be considering outside the daily fray? Each weekend we pick an article or two of special long-term significance and highlight it on Saturday and Sunday with the “Weekend Think” label on the homepage. Try out “Where will your next problem loans originate?”, a recent choice. Read it at

@BankingExchange banking-exchange



February/March 2017

Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at To suggest topics, new blog subjects, and other web ideas, contact Steve Cocheo, digital content manager,, 212-620-7219

/ like it or not /

This dangerous dance


inding common ground is not weakness. It is the mark of true leaders in a democracy. It is essential now. Especially now. A good many bankers, investors, and business people generally continue to be optimistic about the prospects for a return to a favorable economic climate. There is good reason for that. The election of businessman Donald J. Trump to the Presidency was, to use one banker’s phrase, “a game changer.” No t on l y d id Tr u mp pr om i s e t o realign trade pacts, boost infrastructure spending, pass tax reform, and roll back regulations, he and his team have already taken steps to implement several of those promises and others. However, a prominent banker, speaking at a recent event, cautioned against being too optimistic because many of these proposed changes will take time. One reason why, in our view, is because it’s obvious that nearly everything the new president proposes is being fiercely contested, in part as a result of how the changes were rolled out. Americans of every political stripe have always had an inborn resistance to having changes rammed down their throats. And so the election, instead of producing an easing of the divisions opened by the long and harsh campaign, has deepened those fissures and opened new ones. Evidence of escalating strife fills the news and conversations literally every day. Here are some suggestions to arrest what we perceive to be not just a passing phase, but a very dangerous dance. • To President Trump: If you want this presidency to go down in history as memorable for good reasons, use the opportunity rightly. This is not a power game. This is a sacred trust that we, the people, have granted you and your team. It’s good—even surprising—to fulfill campaign promises, but governing is not campaigning. And remember, Mr. President, as you yourself noted in your inaugural address, you are the President of the entire country, not just those who voted for you. So it matters a great deal



February/March 2017

how you fulfill your promises. As a country, we are like the parable of the five sticks. When bound together, they are unbreakable. When the ties holding them together are cut, each stick separately can easily be broken. Some of the ties holding this country together— common bonds of purpose and good will—have already broken. We need to retie them, not cut the rest. • To those opposed to this new Administration and everything it stands for: Consider that many in your ranks claim to be for tolerance and equality. Yet they refuse to respect the views and beliefs of the millions of their fellow citizens who had strong reasons for voting for President Trump. Further, those opposed think that by “resisting him at ever y turn”—they will accomplish something constructive. They will not. Nothing good can come from bitter resentment. Statesmanship is two-way. • To both sides: No governing group can simply impose its will upon the people of this land. Is that not the primary reason this country was founded? Many would argue that the flaunting of this principle is what caused so many people to vote for a new regime. Some of those people no doubt are pleased by the Trump administration’s give-no-quarter approach. Yet, if we have simply substituted one group’s impositions for another’s, all we will have done is to perpetuate a grudge match, with each test more bitter than the last. It is not too late to halt this downward spiral, but it soon could be. Here are a few ways to start: • Stop the personal, caustic attacks. President Trump put his left hand on two Bibles when he took the oath of office. In both of them he will find, in Proverbs, “A soft answer turneth away wrath.” This does not just apply to the President. • If each person, whether a private citizen or a public servant can remember one thing, remember this saying: “Any fool can make an enemy. It takes a good man to make one’s enemy one’s friend.” And if “friend” is too big a leap, then just try being civil. It will lead to a better place than where we’re heading now.

BILL STREETER, Editor & Publisher C


“If we have simply substituted one group’s impositions for another’s, all we will have done is to perpetuate a grudge match, with each test more bitter than the last”








Can America grow new banks again? Cybersecurity is everybody’s is The next thing: Agile banking? 5 AML technologies you must underst Due diligence—checking out a bank 4 internal frauds and how to spo them Quick lessons in loan swaps Making “Three Lines of Defense” w Blockchain: What you need to know NOLs in acquisitions … simplified Hang on—Big Tech is remaking banking 4 techniques for better finan management. Have the right conversation with customers. Get real about strategic planning in 11 steps Fintech and banks shaking hands Panama Papers: Hot—but issues aren’t new Getting ready for more H NEWS AND BEYOND Digital strategy: Does your bank have one? - Bank tries out Pokémon ANALYSIS. Go “Flying money” may land inINSIGHT. U.S. What’s new with SOLUTIONS. neobanks? Day the life of Compliance 10 reasons fintech startups fail. When blockcha cryptocurrencies, and AML meet Brexit Blues: “We Don’t Need No Education” CFPB means it as you read it. How community banks can survive Banking on artificial intelligence How are marketplace lenders


Partnering with a car buying service could help community banks drive auto loan business By Ashley Bray, contributing editor


he challenge for many banks is to determine the most effective time to market products like auto loans to their customers. The bank is often out of the loop on the product research process—increasingly done online—and is only considered, if at all, at the end of the process. “Banks are stuck in the traditional product-centric mindset,” says Robert Meara, senior analyst, banking group, at Celent. He says banks do invest money in marketing analytics to try and figure out when their customers may be interested in a mortgage or auto loan because “promoting those things in ways that are not timely or relevant is a waste of time.” But that’s still late in the process. What if the bank was involved at the start of the auto buying process—in the research phase? This is what GrooveCar aims to do. Currently, the company only serves credit unions, but David Jacobson, president and CEO, is open to working with community banks, who he believes could

also benefit from GrooveCar’s programs. “I’ve always been a firm believer that you should do what you know on your own, and you should absolutely bring in resources, and in most times outsource, what you’re not really great at,” he says. A car dealer for many years, Jacobson noticed a disconnect between credit unions and dealerships. “ The credit union’s goal is to make sure that the members did not finance the car at the dealership, and the dealer’s goal was to make sure that the members financed through someone at the dealership other than the credit union,” he says. Ja cobson launched GrooveCa r in 1999 to bring together the credit unions and dealerships, and the company now offers several programs.

Get them before the dealer GrooveCar Direct gets the credit union involved at the start of the auto buying process by providing a website template, which is then branded with the particular credit union’s name, rates, and other

“Wheeling and Dealing” Though banks are still leaders in auto lending (35.1% market share of total financing), with captive finance companies second (28.3%), credit unions (third, at 19.6%) are the fastest-growing segment. This data (and data, right) is from Experian’s State of the Automotive Finance Market report for third-quarter 2016.



February/March 2017

Example of car buying ad for credit union websites provided by GrooveCar. It would do same for banks.

information. The site includes everything a member needs to research a vehicle—crash test ratings, gas mileage, dealer inventory, etc. As the customer is searching, advertising for the credit union’s loans and financing appear. “The best chance that you have of getting an auto loan is if your members come

Auto loan balance, by lender (bil.) 2015 Q3



2016 Q3





All banks



$250 $600

Captive auto


$358 $800


Credit union



to you and shop for a car before they go to the dealership,” says Jacobson. “Once they go to the dealership, the dealership is going to put them through somebody else’s financing.” Most often, that is a captive finance company or a large bank. At the moment, the GrooveCar Direct program works with about 200 credit

Leasing, enables credit unions to offer leases through dealerships. Credit unions handle the lease payments and the credit risk, and CU Xpress Lease takes care of the rest, including the residual risk, setting up lease deals, and managing the relationships with the dealerships. TrueCar, another web-based car buying service that connects with a broad network of dealers, also works w ith credit unions as a NAFCU partner. With programs like these, Celent’s Meara sees opportunities for banks to move past their traditional approach. “Rather than selling a product and product attributes and hoping you do that at the right time, why not be involved in helping your customers/members actually get what they’re after?” he says. “If you do that, you’ll be much more likely to win the business that you provide.” Opportunity is ripe. Aside from USAA Federal Savings Bank’s online car buying service, where members can shop for cars and apply for an auto loan, bank programs that rope in buyers early in the car buying process are pretty nonexistent. “Because it’s fairly distinctive now, it’s probably a great time to jump on,” says Meara. He also urges banks to consider what else they can offer around car loans. For example, USAA also offers its members auto insurance. “Being a one-stop shop for their members,” says Meara, “is really useful customer engagement.”

unions, and the goal is to sign up 400 more by the end of this year. Some of the credit unions go on to take part in GrooveCar’s other programs, including indirect lending, which allows members to finance through their credit unions right at the dealerships. GrooveCar’s leasing segment, CU Xpress

Avg. loan & lease terms (mos.)

Risk distribution of open loan balances 4.28%

2016 Q3




New loan Q3 2015






New lease Q3 2016

Deep subprime




Super prime

February/March 2017




Can we grow new banks AGAIN? U.S. conditions may thaw, but big shift may take time


t seems like now is a good time to charter a new bank. The FDIC released its Handbook for Organizers of De Novo Institutions in December 2016 and solicited comments. It is a positive step. The community banking industry is experiencing significant consolidation. Since the beginning of 2010, over 2,000 charters have gone away. In the same period, only five new banks have been chartered (six are in organization). The reasons for this shortage are: • First, and probably foremost, it is simply cheaper, easier, faster, and more efficient to buy an existing bank than to apply for a new charter. • Second, many individuals took a big financial hit in the economic downturn. Potential investors have been more “prudent” (read: “stingy”) since then. • T h i r d , i nt er e s t r at e s a s wel l a s potential returns took a sustained hit post-recession. Today, however, the industry and the overall economy are improv ing. The Federal Reserve increased interest rates twice in 2016, and will likely do more this year. Also, we have a new president whose

administration is widely expected to cut corporate tax rates and reduce (to some degree) the regulatory burden, which can only mean positive things for the community banking industry. Hopefully, these factors, together with the FDIC’s efforts, will help to jump-start

de novo activity. We need new, energized, and visionar y banks to step into our nation’s communities. Adapted from a blog by bank attorney Jeff Gerrish on www. To read more, visit

Banking the “gig economy”


new generation will take financial services into the future. In our new blog Next Voices, the younger generation shares its views. This article is adapted from a blog by Harvard student Amrita Vir, research assistant to Jo Ann Barefoot, senior fel-



February/March 2017

low at the Mossavar-Rahmani Center for Business and Government at Harvard. The gig economy has revolutionized the way we think about free market economics, employment, and regulation. With the proliferation of services like Uber and TaskRabbit, it’s clear these businesses/jobs don’t fit neatly into traditional business or regulatory taxonomies. The gig economy involves employees or contractors who get paid to complete short-term, autonomous gigs. Because few banks have taken on the challenge of marketing services to gig economy workers, “disrupter” companies are filling the gap. Uber has a trio of big things going that should call banks to action:

1. Bank accounts. Uber partnered with GoBank to offer drivers bank accounts, debit cards, and instant pay services. 2. Lending. In July 2015, Uber began a pilot of Xchange Leasing with discounts from auto manufacturers and financing options from financial institution partnerships. It guarantees payment by taking monthly leasing fees from drivers’ pay. 3. Instant pay/cash advances. Uber rolled out a free cash advance program in April 2016 in partnership with Clearbanc. There is a huge potential for mainstream banks to ser ve gig workers better. Their presence would foster better consumer protection and responsible lending practices. Read the full blog at


Rates and reg rollbacks are key—neither one is likely to change quickly By Bill Streeter, editor & publisher


he overall bank and capital markets merger and acquisition climate last year was the equivalent of a drought. With one exception: While deal value and volume overall dropped precipitously in 2016— by 48% a nd 32%, respec tively—the ongoing consolidation at the smaller end of the commercial bank sector remained active, continuing the trend of 2014 and 2015, according to PwC’s Banking & Capital Markets Deals Insights: 2016, released in January. “The majority of deal activity was concentrated among the smaller banks,” the report notes. “Regulation is inhibiting acquisitions by the larger banks, and, with a continuing low interest-rate environment and high regulatory cost, it appears that the notion of ‘too small to survive’ has become the new paradigm for small- and medium-sized banks.” The latter are being driven to combine to achieve sufficient growth and scale to help reduce the burden of increased compliance costs, the PwC report notes.

Promise ahead, but when? Bank stock prices shot up like a rocket following Donald Trump’s election as president in November. The higher prices give acquiring banks increased currency and could facilitate more deals, according to bankers. Daniel Klausner, PwC’s capital markets advisory leader, points out that the higher prices were predicated on three assumptions: interest rate increases, rollbacks of regulations, and a stronger economy. “All of that has to come to fruition,” Klausner says. PwC Deals Practice Partner Dennis Trunfio believes the macro trends of the past year will continue through 2017 and beyond—few deals overall with the bulk of the deals at the smaller end of the scale. The report spells out why: “With the new administration and Republican-led Congress, small institutions can expect

supervisory requirements to ease up, and the largest banks are likely to see fewer enforcement actions, too, but the changes may not come into immediate effect in 2017. As a consequence, we expect the ‘too small to survive’ trend will continue among smaller banks and larger banks will likely sit tight. . . .” Regarding rates, again, increases will have a positive impact on banks’ profitability, but the report’s authors don’t think the increases will be significant enough to alter the need for smaller banks to consolidate. Both Klausner and Trunfio agree that size, per se, is not the answer to bank viability, and that there is no absolute size hurdle in any event. “One institution of $250 million in assets could be too small to survive,” says Trunf io, “because of its level of margins and costs, and its footprint.” Another bank, he maintains, with different funding and a greater focus on digital banking, for example, could do well at the same size. “Simply increasing size is not necessarily a recipe for success,” Trunfio adds.

Lessees are all smiles


he access economy business model — allowing user s to rent, not buy, services—has given rise to companies like Netflix. Idea Bank, a €4.8 billion Polish bank founded in 2010 to support small and mid-sized firms, is applying the concept to banking. The bank ’s Happy Miles pro gram uses GPS technology to allow users to lease a vehicle per kilometer, where monthly payments vary depending on distance traveled. Each month, kilometer data is sent to the creditor via GPS. Monthly payment is calculated by multiplying a fixed amount times the price per kilometer. The fixed amount is the calculated interest of the first standard lease payment. The price per kilometer is determined by dividing the lessee’s declared annual mileage by the actual vehicle cost. Idea Bank covers almost 15% of Poland’s leasing market thanks to its acquisition of Getin Leasing and its Idea Leasing department, and Happy Miles is expected to increase that share. Of the remaining market share, one-third belongs to other banks and the rest to various lessors. Only small business entrepreneurs use Happy Miles because they are the sole group that leases in Poland. While tax rules make leasing economical, Happy Miles makes the option even more attractive. “Illness, absence, or vehicle breakdown make it impossible for many entrepreneurs to work actively,” says Klaudia Klimkowska, communication specialist, Idea Bank. “Their vehicles are not used, and business freezes. With Happy Miles, the company’s monthly installment also decreases significantly, protecting the company from liquidity problems.” (Business owners receive GPS data, too, to track and manage their fleets.) The bank is working to implement GPS - based technology and the “pay-as-you-drive” model in other industries, such as long-term car rental and insurance.

February/March 2017





Only efficient lenders have left the recession behind By Bill Streeter



February/March 2017

type of institution >$50B >$25B–$50B >$10B–$25B >$5B–$10B >$1B–$5B >$500M–$1B $100M–$500M <$100M All institutions

Banks –5.56% 3.34% 5.03% 8.42% –0.42% –1.76% –3.23% –2.92% –4.84%

Thrifts N/A –18.45% –5.08% 5.79% 0.33% 3.40% –1.90% –2.96% –8.59%

CUs N/A N/A –7.12% –11.27% –1.12% –1.69% –6.47% –11.34% –3.25%

All Fls –7.36% 3.90% 1.47% 6.39% –0.5 1% –0.90% –3.87% –7.1 7 % –5.64%

Source: FDIC & NCUA Call Reports – Moebs $ervices, Inc. ©2017

Loans to assets 2006 - 2016q3

Loans to assets | 2006 – third-quarter 2016 75% 70%



dit U







Source: FDIC & NCUA Call Reports – Moebs $ervices, Inc. ©2017

q3 16 20

15 20

14 20

13 20

12 20

11 20

10 20

09 20

08 20


50% 20

Nonbank lending data was not included in the analysis, says Moebs, because that data is not readily available. The nonbank—or shadow banking—sector remains largely unregulated, he says, other than by the Federal Trade Commission. Nevertheless, Moebs maintains that nonbank lenders, including firms like Quicken Loans and its of fshoot Rocket Mortgage, along with industrial banks used by auto companies, are a big factor on the consumer front. “The shadow banking market is huge and is targeting small businesses for

Loans to assets: Better in the middle (below/above 2006)


Shadow banks’ impact huge

lenders, which he defines as having low noninterest loan costs (salaries, processing, etc.), fees charged for origination and maintenance, and low-cost funds. “We’re now seeing a group of banks and thrifts who are saying, ‘Why do I need so many lenders?’” says Moebs. These institutions have seen what nonbank lenders are doing and adopted it—namely moving away from traditional underwriting methods to using decisioning software. According to Moebs, these bankers are saying, “We don’t need people to underwrite now; software can do that. We need people to oversee the decisions and track the information.” That can be done by a small group of lenders, he observes. “ The under w r iting process ha s changed,” Moebs explains. “The shadow banks and efficient traditional banks are doing more business with fewer lenders, making the underwriting process extremely efficient.”

loans,” he says, noting that as a small business owner himself, he receives mailed promotions for loans from “at least 15-25 firms.” He believes small regional banks, community banks, and credit unions are being hurt the most by this. The data from his analysis bears this out. Depository institutions below $5 billion and above $50 billion in assets show loan-to-asset ratios that have still not returned to 2006 levels. As shown in the table below, banks between $5 billion and $50 billion in assets had loan-to-asset ratios in 2016 above those of 2006, however; likewise for thrifts between $500 million and $10 billion in assets. These Moebs calls the efficient lenders. Credit unions remained below 2006 levels. Moebs attributes this disparity to the fact that institutions in the middle size ranges where there was positive loan growth “are at their economy of scale in the depository business.” They are efficient



n analysis of call report data for the years 2006 through the third quarter of 2016 indicates lending by depositor y institutions has not returned to levels that existed before the financial crisis and the Great Recession. (See graph below.) The analysis comes from economic re se a rch f i r m Moebs S er v ic e s a nd ref lects data from banks, thrifts, and credit unions. “When it comes to getting a loan, consumers and small businesses still feel the impact of the Great Recession. Using the 2006 loan-to-asset ratio as a benchmark, banks are down 4.84%, thrifts are down 4.84%, and credit unions are down 3.25%,” says G. Michael Moebs, economist and CEO of the firm. Moebs says 2006 was the high-water mark in lending by insured institutions. He notes that while some may v iew 2006’s levels as excessive, consumers and small businesses say it is difficult to get a loan from an insured institution now. He believes the sluggish economic growth since 2006 supports this view. In absolute dollars, loan volume is higher for banks and credit unions for the same period, according to Moebs’ data. But he notes the increase is driven mainly by increases at the largest institutions. In the case of the largest banks, he says, lending predominantly has been to large corporations, investment companies, and the like where the impact on jobs and economic growth has been negligible.

/ Seven Questions /

Let me tell you a story

With nearly 50 years as a banking lawyer, Walt Moeling has seen it all. His stories always have a point By Steve Cocheo, executive editor


a l k i ng t o b a n k i ng a t t or ne y Walter Moeling about an organization that forbade ta lk about mergers and acquisitions—bec ause it may ma ke folk s unhappy—leads to his gentle scof f: “There’s nobody involved in banking who is not interested in mergers.” And then, in typical Moeling fashion, a short point brings him to a story. Walt Moeling always has a story—nearly always with a point or moral for the listener to let sink in. “I was called upon to do a board session, a strategic planning meeting. I told the CEO I was going to talk about mergers. ‘Oh, you don’t need to do that,’ he t old me. ‘My boa rd i sn’t i nt ere st ed in mergers.’ “I told the CEO, ‘If I’m going to talk about strategy, I’m going to talk about M&A. You can’t plan a strategy without knowing where you are heading.’” So the day of the strategic planning meeting arrives, and off the bat, Moeling tells the gathered directors that he is going to discuss mergers. “I like to call it the buy, sell, or hold discussion,” he explains. Everyone froze, Moeling recounts. He decided to speak plainly. “Now, I know you folks sitting in this room do, in fact, talk about this regularly. In fact, that’s what usually goes

“Everything in the South is a parable, a biblical story, a morality tale. When you are explaining something, a story is less confrontational” on out in the parking lot after the board meeting, right?” It wa s then that a board member gasped and turned to a fellow director: “Joe! Did you tell Walt about that discussion we had last week?” Moeling is a man who laughs, and he guffawed right there in the boardroom. The president, who truly believed that his directors never talked about mergers, turned white. “No, Joe didn’t tell on you,” said Moeling. “I just knew it was going on because you fellows are directors, and directors are interested in mergers.”

M&A: always on the table Moeling tells the story to make a point— not just for a laugh. No organization should kid itself that M&A isn’t on the table. The bank that does so risks a very expensive surprise. Moeling believes

boards should discuss the matter at least annually. If they don’t, he predicts, the decision to sell will come “right after you’ve just signed that five-year IT contract that is going to cost a couple of million bucks to terminate.” And this leads to a story about a de novo client bank back around 2006. Moeling brought up M&A. “In an outraged voice, one director says, ‘This is our first official board meeting. We can’t talk about selling!’” Moeling told the director even a brand new bank had to have the talk. The director humphed, “I plan to leave my shares to my grandchildren, and I don’t plan to pass away anytime soon.” Moeling smiles and says, “So the director next to this fellow pipes up and says, ‘Well, I thought we organized this bank so we could sell it in three years.’” Moeling went around the boardroom table. “Expectations ranged from ‘three years or as soon as we can get three times book’ to ‘Never!’” Walt Moeling, now senior counsel at Bryan Cave LLP in Atlanta, is winding up his career of close to 50 years as a banking attorney. Moeling has worked with an industry that went from the days of rigid rules on pricing and the beginnings of consumer protection laws to Glass-Steagall repeal to DoddFrank, Consumer Financial Protection February/March 2017



/ Seven Questions / Board, and now President Trump. Moeling credits his knack for storytelling to growing up southern. “Everything in the South is a parable, a biblical story, a morality tale,” Moeling explains. “People remember stories. When you are trying to explain a nuance to a banker or director, a story is less confrontational. It lets the listener make their own judgment—much more effective than dry facts.” He also can tell a joke on himself. For example, when the financial crisis began to hit Georgia in 2007, people asked Moeling how long area banks would be hurting. “I can look back and say that I was very consistent with my response,” he says. “I said it would be a two-year problem. And I said that continuously from 2008 to sometime in 2013.” He laughs and adds, “of course, that was what everybody hoped.” Q1. How has community banking M&A evolved in your time? Where is it heading? Today, the bigger banks are relatively much bigger—there’s that increasing concentration of industry assets. But in the mid-’70s, early ’80s, two things occurred that began the consolidation. In 1970, Walter Wriston [then head of Citicorp] said there was no reason banks can’t produce 15% a year—be grow th companies. That became the buzz. I am firmly convinced that we have proven he was wrong, because few banks have maintained a consistent history of compound earnings growth of 15% a year—at least not without taking too many risks and ending up in pretty bad trouble, if they don’t either fail or get bailed out. But back then, the buzz was that banks could be growth stocks. Size makes that happen. The other point from that period was the recognition of the illiquidity of the small bank in the small community. This indicated that there would be opportunities in consolidation. For a time, a small bank almost anywhere could probably find a buyer. That’s less true today. Our population has concentrated in urban areas. Unless you have a vibrant small town, you’ll have diff iculty doing any thing. You’ll just slowly liquidate. However, in an awful lot of ways, the recent election was an urban versus rural affair. Small towns, by and large, have 14


February/March 2017

“In an awful lot of ways, the recent election was an urban versus rural affair. Small towns, by and large, have not been doing well” —Walt Moeling not been doing well. Where they are, typically, a local bank has made that difference. You can drive into small towns and tell whether there’s an aggressive, active bank there. One of the many aspects of this recent, strange election is the desire to reconstitute small towns. Many of the voters thought they were hearing that message. And you’ll have a commensurate demand for banks to bank those small towns. This will be fascinating to watch. Some fabulous banks make very good money staying home and making sure industry grows—even if it’s foreign industry coming in. Those incoming manufacturing jobs change the whole tenor of a community. But if your bank is not in an aggressively growing community, you are not going to have buyers. Back in 1980, the prediction was that the industr y would shrink to 3,0005,000 max. It’s 2017, and, you know, we’re still not there. Community banks can still do well, and regionals are growing up a nd doing f ine. Megaba nk s: That’s a whole different world where I have much less exposure. Q2. At the beginning of the Great Recession, we had a chat about the early interest of private equity in community banking. The regulators had just started to facilitate that. How has that evolved? Private equity has become an important element of the community banking sector. It’s penetrated fairly deeply. PE is now seen in banks of $1 billion or less. This is intelligent money—these people know their way around. Not every investment they make is a home run, but they’ve done very well. Their involvement will continue, so long as they are making some money. I’m

talking about PE firms like Castle Creek that know how to run banks. There were some firms that flew in too lightly, didn’t have much experience, and spread around a lot of money in the late 2000s. They are probably not as happy with the investments they made because they thought the crisis was only going to be a two-year problem. Q3. How has the industry’s relationship with regulators evolved? There have been some bad eggs, but most regulators I have dealt with, including during the crisis, were pretty straight shooters trying to do their best. Very early in my career, I was hired to help FDIC close a failed bank, and I found the process fascinating. I came to respect the regulators I was working with. The experience taught me something I constantly remind my clients about. Regulators are people, too. I’ve had a fair number of clients who didn’t believe that, but it’s so. Being people, regulators are subject to human biases. So if you don’t treat them right, it can bring out a bad attitude, such as when you put examiners in a basement and give them cold coffee. What bankers don’t understand is that in 2009, a major change took place nationwide. Washington reasserted control over all of the regulatory agencies’ district and regional offices. Almost all of the leading supervisors in the key positions were retired or replaced, or they retired on their own. Washington acted as if the troubles were the local examiners’ fault, and sent people in to go out and straighten things out. The truth is we had been in a residential construction boom and a construction loan boom. We had had a national policy that said if a house had four walls and a

roof, it would be financed. If anyone had tried to stop this lending in 2005, Washington would have gone nuts. A nd there was a ton of small-time fraud—mostly in special programs for first-time homebuyers. We learned of one guy who bought five houses that way, signing five affidavits that he intended to live in that house. His mortgage banker had coached him: “You might live there someday, so it’s okay to say that.” But my point is the local examiners took the brunt, they had new bosses, and they toughened up. Yet those outsiders coming in were i n t e l l ig e n t p e o p l e , a n d u n t i l t h e y c a m e dow n t o pla c e s l i ke here , i n Atlanta, they’d only seen things from a Washington perspective. I got to know a senior regional executive I’ll call “Fred.” He’d been here about 15 months when I saw him in January 2010 in our elevator lobby. I asked him how he was doing. “Walt,” he said, “this has been the most wretched year of my life. These aren’t bad people. They didn’t really make that many bad mistakes. This was a much bigger problem. But we’ve still got to call the loans as we see them. And the loans are still bad. And so the banks are still closing.” And then he said, “Walt, I don’t want to ever have another year like 2009. But 2010 will probably be that bad, too.” Getting back to your question: Over 48 years, I have had regulatory disappointments. I’ve had problems that should have been resolved, but weren’t. I’ve had clients who felt they were being singled out. But if I had kept a scorecard, it would have come to: Regulators 90, Bankers 10. Q4. It’s still early days, but what do you think of the new administration thus far? We are now in the strangest transition I have ever seen. If I were a regulator, I would not have a clue what to do. There are laws that I should be enforcing. But I’ve got a new administration saying it is going to get rid of all those laws. Now, this is me personally speaking, Walt Moeling: A banking system with i nt e g r it y a nd v i a bi l it y i s e s s ent i a l t o economic well-being, whether it be a sm a l l t ow n or a n ent i r e c ou nt r y. An unregulated banking system is not a good s y st em. We need reg u lat ion and super v ision.

Does it have to be petty and picky? No. Does it have to be detailed in disclosures and whatnot? No. The biggest change I’ve seen in my career is the most damaging. For most of my career, bank regulation, going back to the Depression, was a function of safety and soundness. But as compliance issues became bigger, it was a different matter and not one I think regulators had ever really been trained to handle. Coming out of Dodd-Frank, we had a whole new series of laws and jurisdictions on consumer matters, and a system was created that ignored all the precedent from the Federal Trade Commission. Compliance has devolved into taking scalps and doing “gotcha!”

“We are in the strangest transition I have ever seen. If I were a regulator, I would not have a clue what to do” Now, I’ve never been a fan of caveat emptor. [“L et the buyer beware.”] I see some disgusting stuff out there in the market. The concept of something like the Consumer Financial Protection Bureau at one level isn’t bad. But it’s gone way overboard. As a consequence, I think it’s going to be almost neutered. They could have taken a more substantive approach—achieved pretty much the same results—and yet, not done it in a way that just drove everybody nuts. Q5. Everyone seems to be excited about innovation today. Regulators even want to take part, though some people see regulatory innovation as an oxymoron. We’ve always seen innovation in banking. Ironically, most of it came at the local level and in the lower size range. I helped get some of the internet-only banks started. One of the best was Netbank. It made money consistently—not a lot because it was learning. But then owners grew impatient about asset growth and converted it into a mortgage company. It didn’t last long because it got caught up in the mortgage crisis.

More innovation is coming. I don’t think regulators will hold it back, nor do I think the Comptroller’s Office will hand out fintech charters willy-nilly. I a m a lso a skept ic . Ba ck when I was helping early internet banks get started—22, 23 years ago—they believed branches would be gone by now. Well, they’re not all gone. Consumers want all forms of access. I am a great believer that no one thing will change the world. My grandkids love the latest apps, and they’ve got the time and energy to handle all that. Once they age and have families, will they still have the time for trying out all the latest things? Do we need bitcoins? Not my generation. At my age, I’m just proud I can handle my computer. Q6. How have you seen the emphasis on capital evolve? There’s never been a study demonstrating that capital is the real issue in bank failures. More capital is better, up to a point. But profitability is the key, and this goes back to my earlier point about striving for something like 15% compound growth versus something more rational and less risky. If you are going for 15%, you ought to have significantly more capital than if your target is 10%. The catch is capital requires a return, and it is harder and harder to f ind a return. Trying to get the extra 2% or 3% margin to show in your core financial statement is probably the worst thing in banking. Really good bankers know that losses take place on the fringe. Q7. What’s a key lesson you’ve learned in 48-plus years in banking? To me, the potential earnings power of a good community bank is never sufficiently recognized. And the value of that bank to its community is the corollary of that. With apologies to Gordon Gekko [the ruthless stockbroker, played by Michael Douglas, from the 1987 Oliver Stone movie Wall Street], greed is a terrible thing. If you look at the power of compounding, you can invest your money in a bank that earns a steady 9% or 10% and celebrate over time. But I’m just pontificating. Anyone who takes f inancial advice from a law yer deserves what he gets. February/March 2017




Banking: How you

remain relevant

Technology merges with strategy to produce quick, decisive, crossorganizational action

By John Ginovsky, contributing editor



February/March 2017

Shutterstock/ ESB Professional


gile banking,” a term of the moment, becomes something to take ser iously when it is shown to cut costs, increase efficiency, please and retain customers, empower employees, and add to the bottom line. Make no mistake, agile banking is a real thing. Some banks, big and small, have started to recognize its merits. A few of those have actually implemented it in some way and have shown results. Some say it’s the future of retaining relevancy for banking as a whole, even as both technology and business operations in the wider world evolve. Take an example at a real bank. A chief appraiser comes into a bank and finds that the whole appraisal system runs on 1990s-era Microsoft applications. Basic customer information is rekeyed into different bank systems up to six times with associated forms printed out, distributed to different office in-boxes and checked, then redistributed for signature, consolidated, and processed some more until final approval. “I’ve been with the bank four years,” says Michael Pratico, chief appraisal officer at Columbia Bank, Fair Lawn, N.J., in an interview with Banking Exchange. “I was never in banking before. When I came and saw how we were doing this, I literally watched people typing in the

February/March 2017



/ Agile banking / addresses of properties four, f ive, six times. I thought, ‘This is just stupid.’” A s a result, this area of the bank formed a unit based on agile banking principles of quick, iterative, collaborative decision-making, ending with the adoption of a new workf low tool. This allowed for changing most of the process from manual to digital, according to Pratico, where information is keyed in once and shared, and most actual paperwork is eliminated. “For the same amount of payroll [in our depa r tment], over a three -yea r period,” Pratico says, “we’re producing 25% more work. Also, when I talk to the two administration folks, they are so much happier not to be doing the redundancy and the printing and so forth. Instead, now they’re helping frame out appraisal reviews and doing basic analysis.” The $5.1 billion-assets bank also will save thousands of dollars every year on document imaging, he adds.

What is Agile Banking? Agile banking seems to work. But what is it? On one level, various bankers and consultants gave various definitions in interviews with Banking Exchange. As a whole, they paint a pretty clear picture. “I would def ine agile as being prepared and being able to take advantage of opportunities in the market. It also is being open-minded and willing and courageous enough to do it,” says Steve Miller, president and CEO of $334 million-assets Fresno First Bank, Fresno, Calif.

With agile banking, Fresno First can do 95% of what big banks do without much of a cost hindrance, says Steve Miller.



February/March 2017

Agile means being more collaborative, quickly adaptable, information driven —Stephanie Sadowski, Accenture

Stephanie Sadowski, managing director, FS Distribution & Marketing Practice, North America lead, Accenture Consulting, puts it this way: “It would be operating a more collaborative and quickly adaptable financial organization that is driven more by knowledge and information.” According to Steve Williams, founder of Cornerstone Advisors and lead of its strategic planning practice: “It is the idea of being more quickly adaptable to competitive and market conditions.” “To me, agile banking is taking the concepts of ‘faster’ and ‘easier’ and inculcating them in all parts of the operation,” says Joseph Cady, managing partner of CS Consulting Group. A technologist’s view adds further dimensions. “People sometimes misinterpret agility as reorganizing so they can get stuff done quicker,” says Alexei Miller, managing director of DataArt, a technology consultancy and builder of proprietary systems. He points out that agility is three concepts mixed together: pace of development, being able to change along the way, and regular production of something useful. “Technology people put particular emphasis on the last one,” he says. The danger, though, is assuming that agility just has to do with technology. While the concept of agility has its roots in software development, it goes much deeper as it applies to banking. Agility relates more to the intersection of new technology with a broader, less-siloed

approach to business strategy, organization, and process. “The idea is you need to start taking the management and operations of a financial organization and start adapting some of the things that have made technology companies viable,” says Williams. “Agile started in the software business, but as an idea of bringing knowledge, collaboration, and adaptability. Some of those principles work in terms of running an organization.” “ You can star t to think about the c onc ept of ‘D e v O ps’ ver su s hav i ng a development t ea m a nd a n operations team,” points out Sadowski. “If you are constantly improving things, those t wo become one to get bet ter collaboration. It’s a huge cultural and organizational change.” From a practical point of view, Fresno First’s Miller says: “It just allows us to have a better process for a lot cheaper.” This is a sentiment that bigger banks share. In an essay published on the Financial Services Roundtable website, Greg Carmichael, president and CEO of Fifth Third Bank, the $143 billion-assets, Cincinnati-based regional, explains why. “To me, technology needs to help solve a business problem or create a business opportunity,” Carmichael writes. “Technology is a means to an end, allowing us to do something faster, better, and cheaper. Most important, it allows us to better serve our customers.”

Why do it? — internal pressures Fundamentally, agile banking focuses on improving conditions for customers of all types, starting with internal customers, such as the ones Pratico’s appraisal group at Columbia Bank has. “In our case, our customers are really t he lend i ng a nd r i sk m a n a g ement [departments],” Pratico says. “We have internal customers. We were finding that the process we were using to manage was so disjointed that people were often in the dark. No one knew what was happening until the very end.” Mi ller say s much t he sa me t hing about Fresno First Ba n k . “It [ag ile banking] is the intention of trying to improve internal processes that affect internal and external customers—not just processes that affect external customers, but the whole idea of having a faster service time and response time to [all] our customers.” This, again, has practical implications. “If I went into a bank today and said they are going to have to do three times as many loans tomorrow as they do today, they would have no choice but to add about twice as many people to get that done,” maintains Michael Croal,

Digital agility can help banks shave 10 to 15 percentage points from efficiency ratios, says consultant Michael Croal. consultant, Agile Banking. “When you have more digital processes, you can scale. You don’t have to add people.”

Why do it? — external pressures

It pretty much comes down to keeping up with the competition, which increasingly includes not only other banks, but also nonbank innovators. “I was in the banking business for 20

Community banks that don’t learn from fintechs risk irrelevancy, warns Joseph Cady, CS Consulting Group. years,” says J. P. Nicols, who is now a banking consultant and managing director of the FinTech Forge. “For most of my career, we just thought about what other banks were doing. Our competitors were very well defined and a very small number of them. Now, it is possible to live your financial life without a primar y relationship w ith a bank. Every single line of business that every bank is in now has one or more non-

Shutterstock/ gst

When you have more digital processes, you can scale. You don’t have to add people bank competitors, let alone the way big banks have really fueled the f intech arms race.” Research a lso points to the everchanging, ever-demanding expectations of consumers. In a recent report, Alan McInt y r e , sen ior m a n a g i ng d i r e c tor, head of Accenture Banking, says: “Consumers expect nearly all of their transactions to be on par with the service they receive from ‘GAFA’ [Google, Amazon, Facebook, and Apple] companies, which poses a challenge for banks

February/March 2017



/ Agile banking /

in par ticula r. Bank s need to create branches that provide an advanced digital experience combined with convenient locations, while also developing an online digital experience that can compete head on with the tech giants.” It’s not only the tech giants, but others in banking. “The large institutions are taking lessons from the fintechs and applying them to their systems. Community banks that don’t recognize this, at some point, they risk becoming irrelevant,” says CS Consulting Group’s Cady. Fifth Third’s Carmichael makes this clear in his essay, writing: “The majority of financial services innovation will likely continue to happen outside of banks, as it has in the past few years. However, I believe that the majority of value creation will happen within banks, as banks will continue to serve customers. This complementary relationship creates a win-win-win for the banks, for fintechs, and more importantly, for our customers. At Fifth Third, we have a holistic ‘build-partner-buy’ strategy on financial technology.” Miller’s bank, Fresno First, recognizes this sit uation. With the ag ile banking approach, he points out, “We can pretty much do 95% of the stuff the big banks do, and there’s really not much of a cost hindrance.”



February/March 2017

Process improvement is not a ‘one-off.’ It’s a living, breathing part of business Iteration is key

One word comes up time and again when talking about agile banking: “Iteration.” “The idea of iteration is that things change too quickly,” says Cornerstone Advisors’ Williams. “Organizations slow themselves down too easily. Instead of shooting from A to Z, you have to first build A and then build B and go on that way as you learn. There also is that continuous feedback loop that makes you build something more accurate because you’re learning and updating each time.” Put another, more conceptual way, consultant Nicols says: “[Iteration] is a course correction, but it’s also a faster course correction. If you sail a ship and you are one degree off course, solving that in the first half hour isn’t a big deal; solving it 12 hours into your cruise, now you’re hundreds of miles off of where you are supposed to be. So the important part is making little course corrections regularly, not at the end of the project.”

Nicols adds: “There is an element in agile called a ‘sprint’ when you have a short one- or two-week process to get something done or create a specific feature. The real purpose of a sprint not only is to move quickly, but to move incrementally and iteratively. Each iteration should be better than the last.” In other words, make quick and constant tweaks not only to stay on track, but to improve the track even as circumstances and the environment change. “The minute you find something sliding, you have to go after it and be very aggressive about it,” Fresno First’s Miller says. “So it’s a constant process. Process improvement is not a ‘one-off.’ It’s an evolving thing, a living, breathing part of business. Once you start, you have to stay committed.” In a like vein, Columbia Bank’s Pratico points out: “Once something rolls out, that’s not the end. We are going through this iterative process where we are constantly ref ining the tool to

ref lect things that we may have missed or not thought about. The env ironment is changing pretty rapidly. What we thought made sense 12 months ago may not be quite as applicable now, just because of the evolution of the market.”

Inertia vs. leadership People interviewed for this article suggest that adopting an agile banking approach requires a fundamental change in culture and comfort zones. There will be resistance. To be successful, organizations need leadership from the top and enthusiasm through the ranks. “ There were inter na l roadblock s” when Fresno First Bank started changing things, Miller admits. “There was just lack of knowledge or fear of making progress. The same people who complain about the process, when you give them a very good solution to fix it, they complain about the solution. I’d say that’s human nature. As senior managers, you have to stay committed to seeing it through and recognizing who the real roadblocks are. If they are truly, truly trying to derail something, then you go right after it. You have to either convince them or move them out of the way.” In Columbia Bank’s case, Pratico found support from his staff. “I started talking about it with my staff, and I was blessed, and maybe unusually so. Just about all of them were hungry for this change. When I presented the idea, there was a lot of interest. The other key, too, and this is probably true for any kind of change: They were involved at every step of the process. They had a vote. We literally sat down every bit of a dozen times, formally, and came up with ratings and metrics and how we would look at them. When we f inally made the choice, it wasn’t my choice. It wasn’t the CEO’s choice. It wasn’t one appraiser’s choice. It was the department’s choice. When you own the decision, you’re more likely to embrace it.” A lot of it ties back to leadership culture and organizational structure, Accenture’s Sadowski notes. “When you look at how traditional banks are structured, they are very siloed, very regulated, and very bureaucratic,” she says. “The reason they go there is sound logic. They are all managing risk. The challenge is they’ve taken that risk-averse approach and applied it everywhere. There are areas where they don’t need all of the structure and silos

for risk management, and they need to pivot in order to empower their people to deliver stuff sooner.” Ag ile Bank ing’s Croa l champions the idea of designating a specific “process owner,” who has the clout and the acumen to align the path that given t ra n sa c t ion s t a ke a cross t he or gan i z at ion , such a s b e t we en lend i ng departments, compliance departments, servicing departments, and so on. “The process owner needs to have an understanding of the impact of operational efficiency to the profitability [of the organization],” Croal says. “It has to be somebody who knows banking.” The process owner doesn’t do the fixing, Croal adds. That person needs a team to reengineer the process, and the team should include stakeholders from all the affected areas. Further, he says, the process owner “needs to have a say that if this particular technology can’t integrate [with other systems], then get rid of it and get something else. Or if these employees can’t perform their jobs correctly after they have been educated, he or she can say, ‘I don’t want them any more.’”

Staff buy-in is key to agile banking. If you own a decision, you’ll embrace it, says Michael Pratico, Columbia Bank.

Measuring success Numbers don’t lie, as Fresno First’s Miller points out. “When you make a change, you have to track it. You show people what you’re doing, make sure you train people the right way and educate them, and communicate clearly. Then you track the hell out of it so people know that it’s working. Then, for any of the naysayers, you can shut them up pretty quick.” Croal estimates that banks can shave 10 to 15 percentage points from their efficiency ratios with digitally agile processes. “This is worth $750,000 to $1 million per year for the median community bank between $100 million and $2 billion in assets,” he says. But it’s not all profit and loss numbers. “Managing innovation is different than managing business as usual,” says consultant Nicols. “You have to look at metrics that aren’t financial early on. You have to look at how many new products did you launch? What percentage of our ideas are coming from new sources? How much faster are we moving on those things?”

The wrap-up Agile banking is just taking hold. It could be the thing that keeps banking relevant.

“Make little course corrections regularly,” advises consultant J. P. Nicols, “not at the end of the project.”

“I left my 20 years of banking in 2012,” says Nicols. “What I’ve been focusing on since then is this intersection of banking and f intech innovation. In 2012 and 2013, I got a lot of bemused smiles, paternalistic pats on the back, a lot of ‘That’s cute, son. I run a real business.’ In 2015 and 2016, many of those same directors and CEOs were calling me. The tide is beginning to change, but it’s still a long battle.” Consultant Cady puts it this way: “Banking is at the cusp of a huge seismic change. It’s coming, and how you remain relevant, that’s the overriding question. The answer is agile banking.”

February/March 2017



Collaboration not Competition By Lisa Joyce Valentine, contributing editor



February/March 2017


intechs are multiplying like rabbits. Global investment in financial technology companies has tripled since 2014, according to Accenture’s Fintech’s Golden Age report. In first-quarter 2016, investment increased 67% over the same period the previous year, the report noted. McKinsey & Company estimates that there are 12,500 fintechs worldwide. In addition to an increase in the inf lux of capital, there’s been a marked change in the type of fintech investments from competitive to collaborative offerings. In 2010, 60% of all the investments in fintechs were directed toward competitive offerings versus 40% in 2015, says Robert Gach, capital markets


Fintechs shift from “We will rock you” to “We need you”

technology at $1.3 billion-assets Orrstown Bank, Shippensburg, Pa., concurs that a shift is occurring. “We are seeing more banks partnering with fintech companies,” he says. But the partnership isn’t one way. Fintechs benefit as well. “Fintechs are recognizing that they can grow their business if they partner, rather than compete with banks,” notes Wallace. Chris Tremont, executive vice-president of virtual banking for Boston-based Radius Bank ($850 million in assets), has partnered with fintech companies for five years. “When we started working with fintechs, a lot of financial institutions seemed to have an ‘us versus them’ mentality and were either scared to work with fintechs or viewed them as competition. Today, banks and fintechs seem more willing to partner,” he explains. A note of caution comes from an executive with one of the broadline bank technology providers. “Partnering with a competitor can be risky,” says John Zepecki, group head, global lending product management at D+H Corp. He points out that some companies did not fare well after partnering with Amazon for distribution and other services. “The lines get blurred when competitors partner,” he says. “By contrast, bank technology companies are interested in helping financial institutions be more successful. That’s our business.” In Banking Exchange’s October/November 2016 cover story, “Core Systems at a Crossroads,” one of the complaints expressed by banks about tech providers concerned the slow pace of innovation. Zepecki notes that tech companies have a responsibility to keep up with the latest trends and provide competitive products. Because most banks have relationships with one of the bank technology companies, the issue of choosing between the known and the lesser known is complex. And it’s not necessarily an either-or decision, as discussed further on. For those banks ready to partner with fintechs, however, here are six guidelines to keep in mind.

6 strategies to get the most out of fintech partnerships

managing director for Accenture Strategy. Part of the reason for the change is that banks are shifting their view of fintechs, seeing them as more friend than foe. In a recent survey by Manatt, Phelps & Phillips, LLP, 86% of regional and community banks say that working with fintechs is “absolutely essential” or “very important” for their institutions’ success. PwC agrees that partnerships are critical, predicting in its Blurred Lines: How Fintech is Shaping Financial Services report that more than 20% of financial services business will be at risk to fintechs by 2020. Collaboration can alleviate some of that risk. Ben Wallace, executive vice–president of operations and

1. Lead with Your Need With so many fintechs vying for bank attention, it can feel overwhelming to choose the right partner. Dan Mercurio, senior vice-president, consumer and small business banking, Cambridge (Mass.) Savings Bank ($3.2 billion in assets), recommends that banks evaluate their needs first to avoid being distracted by new technology. “Identify the problems you are strategically trying to solve, and then determine if a fintech partnership is the right way to solve that problem,” says Mercurio. He adds, “By analyzing your needs, you’ll whittle down your consideration set.” Accenture’s Gach agrees that banks need to begin any partnership with a vision of what they are trying to accomplish, such as filling in product or service gaps or improving customer service, or they risk being overwhelmed by the number of fintechs to choose from. Clear objectives help the fintech as well, says Jeff Helm, director of account services for Race Data, a data-driven Canadian marketing fintech that uses customer behavior data to drive personalized engagements between a bank and its customers. “A plan gives us a framework to communicate with the bank.” Canh Tran, cofounder and CEO of Rippleshot, a fintech that uses machine learning and data analytics to identify fraud, agrees. “A successful partnership needs corporate resources to succeed, so the objective of the partnership must be clear February/March 2017



/ working with fintechs /

If the fintech team doesn’t appreciate compliance and security, move on

2. Share Interest in THE Outcome For a partnership to work, both bank and fintech have to see the value in the partnership, says Orrstown Bank’s Wallace. “If either party is carrying all the weight, the partnership should be a no-go.” Orrstown Bank, headquartered in a small town about an hour outside Harrisburg, Pa., partnered with Race Data. For Race Data, the partnership was a chance to expand its business beyond travel and retail into financial services. Race knew it would face a learning curve working with a bank, but the fintech was committed to the partnership, including becoming Service Organization Control (SOC) 2 compliant. (SOC2 is an accounting standard banks can use to help determine the security, availability, processing integrity, confidentiality, and privacy of third-party systems.) Both the bank and Race Data had “skin in the game,” and both were willing to allocate resources to making the partnership work. “This was not an experiment,” says Helm. “We all really wanted this to succeed.” Rippleshot’s Tran says that trust between the bank and fintech is critical to ensure that both parties benefit. “Our bank partner has to trust that we can deliver what we say we can deliver, and we have to trust that the bank won’t steal our intellectual property and move to another vendor.” He adds, “It takes a while to build that trust and deepen the partnership.” Shared passion for the project also is important, notes



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Mercurio of Cambridge Savings Bank. The bank’s team was excited because it would hold the distinction of becoming the first bank to offer a robo advisor integrated into a retail offering. San Francisco-based start-up SigFig was excited to partner with Cambridge Savings Bank since it was its first foray into financial services. “When a fintech is trying to prove that they can work with banks, they are more willing to collaborate around custom development,” points out Mercurio.

3. Understand and Embrace Cultural Differences

When Cambridge Savings Bank partnered with SigFig, Mercurio was prepared for a potential culture clash. “We’re a 200-year-old community bank, so we knew there were going to be differences in how we do business,” he recalls. But the bank selected SigFig, in part, because it valued those differences. “From the beginning, SigFig acknowledged that while they had the product, we had the loyal customers,” he says. “They appreciated our legacy and what we brought to the partnership.” Good planning alleviated much of the stress that cultural differences can breed. For example, SigFig worked at a faster pace than the bank was used to, so Mercurio encouraged the bank team to have candid conversations with SigFig about finding a pace that was comfortable for the bank, yet kept the fintech team engaged and energized. Cambridge Savings Bank’s team also learned from the differences. “We are better at managing projects as a result of working with SigFig,” says Mercurio. Since the launch of the automated investment service, the bank created a formal project management office and hired a project management head. Part of the culture puzzle is to find common ground. Radius


enough and important enough” to attract resources, says Tran. It’s very important to understand your strategic plan and business model before embarking on a partnership, adds Tremont. “Identify the short-, mid-, and long-term plans, and evaluate how the fintech partner will solve those problems.”

Bank’s Tremont recommends that banks understand how the fintech’s mission aligns with their own mission. One way to ensure alignment is to get to know the fintech management team and its board of directors to understand how the fintech views the banking industry. “This understanding sets the stage for a better long-term relationship,” notes Tremont.

4. Determine the Vendor’s Willingness to Address Compliance

At Radius Bank, finding fintech partners that invest heavily in security and privacy, and understand the importance of regulatory compliance is critical. “We put compliance and security on the table from day one,” says Tremont. “If the fintech team doesn’t appreciate the importance of these factors, we don’t work with them.” This is an area where established bank technology companies—also disrupted by the fintech “revolution”—have an advantage due to long experience with compliance issues. Cambridge Savings Bank engages its internal compliance, risk, and legal teams early in the fintech selection process to discuss and resolve potential issues. The bank also elicits feedback from its regulators. “We knew we would face compliance challenges building a digital investment solution. Involving those teams early on allowed us to identify those challenges up front and tackle them,” says Mercurio.

Shutterstock/William Bradberry

5. Worry About Legacy Integration from the Get-Go

A recurring theme, particularly among small- and mid-sized banks that tend to be dependent on one of the three largest bank technology companies, is the difficulty of integrating an application from a fintech or any third party into their overall tech package. As several bankers told Banking Exchange, the large companies will at times decline to work with third parties, forcing the banks to use a service offered by their core provider, which may not be their first choice. Some core providers, however, take a different approach to integrating outside applications. John Jones, president and CEO of bank-owned core provider DCI, says banks need to consider legacy integration before they focus on the fintech product capabilities. “Often, the integration is an afterthought,” says Jones. That said, DCI is open to integrating with fintechs, but first vets these companies to ensure that shared data will be secure. “Once we integrate with a fintech, we may then offer that integration to all our bank customers,” Jones explains. Orrstown Bank relied on in-house technical staff to integrate Race Data’s marketing analytics with its Jack Henry core banking solution. Some fintechs already have partnerships with financial institutions, and the bank may be able to leverage already existing interfaces, notes Wallace. Cambridge Savings Bank brought its online banking provider Digital Insight, owned by NCR, into initial conversations with SigFig. Digital Insight was enthusiastic, says Mercurio. “SigFig engineers worked with Digital Insight engineers, and we achieved the integration we desired,” he says. “I give both partners a lot of credit for dedicating time to work with each other.”

6. Apply Standard Vendor Management with a Twist

Wallace notes that Orrstown Bank applies the same vendor management program to all vendors, including fintechs. However, there are times when the bank’s management decides to make an exception based on extenuating circumstances. “A fintech may not have the same type of financial documents a public company has,” points out Wallace. “Although we follow the same due diligence process, we may evaluate the results a bit differently.” Accenture’s Gach concurs, saying that banks may need to be flexible in their selection criteria. “If you apply the same criteria to a fintech as you do to a traditional provider, you may screen out your best fintech partners,” he maintains.

Worth the Effort

There is, perhaps, a bit—or a lot—of work needed from a bank to create a successful partnership with a fintech. But for the banks that have taken the plunge, the rewards are worth the extra effort. Says Wallace of his bank’s decision to work with a fintech company without a track record in financial services: “We couldn’t rely on our core provider to give us the products we needed to be aggressive in analytics. We needed someone with domain expertise that could help us deliver something really powerful to our customers. Working with a fintech isn’t without challenges, but at least fintech provides an option for delivering what we need.” Partnering with a fintech also can stretch a bank in positive ways. “We find it refreshing to work with fintechs that haven’t grown up in the banking industry, because they are willing to question the status quo,” says Tremont. “We never say ‘because that’s how it’s always been done.’ We’ve learned to have open lines of communication to find creative solutions to problems.”

February/March 2017



/ Risk Adjusted /

more eyes on sales


thical lapses by financial services companies have caused ripples that will affect banks for years. Increasingly, this has become a risk management concern as each outbreak registers on multiple fronts. In the wake of the Wells Fargo sales scandal, other large banks conducted their own reviews of sales practices or otherwise attempted to make clear publicly that their programs didn’t have the exposure that Wells experienced. JPMorgan Chase’s Marianne Lake, CFO, told a third-quarter earnings call audience that the company had found a few examples of problems with employees’ cross-selling practices, but that they weren’t “systemic.” Meanwhile, U.S. Bancorp Chairman and CEO Richard Davis said in his company’s third-quarter call that he didn’t look at cross-sell numbers: “We don’t set quotas.”

Exams and self-exams As the industry has paid more attention to these issues, there’s been a trend to 26


February/March 2017

look at bank philosophy, and the pragmatic need to make a profit. Last October, William Dudley, president and CEO at the New York Federal Reserve Bank, addressed another in a series of the bank’s conferences on banking culture w ith a speech balancing realism and idealism: “ The industr y’s shared norms—its culture—will not change by mere exhortation to the good, whether from me or from the industr y ’s CEOs. In my experience, people respond far more to incentives and clear accountability than to statements of virtues or values. The latter are worthy and necessary, but remain aspirational or even illusory unless they are tied to real consequences. What does it mean for a firm to profess to putting the customer first, if employees are compensated and promoted regardless of what’s good for customers? Or, worse, if they are not held to account for activities that can harm customers?” Later in his speech, Dudley asked a question pointing r ight at r isk

management: “Do risk managers have the appropriate authority [in their banks] to challenge frontline revenue producers and prevent activity that is questionable?” Ultimately, no business can survive without sales, and for compliance expert Rich Riese of SMA ART.COnsulting, a former senior federal regulator and ABA compliance official, banking sales hinges on a fundamental premise. “I still see it very much as part of the trust relationship that banks have traditionally leveraged,” he says. “Bankers have always tried to be their customers’ trusted financial partner. The hope is that the sales process produces the proverbial win-win. The customer gains a valuable service. Banks are not in the business of giving things away—and they shouldn’t be.” Earlier this year, Wells Fargo, working to distance itself from the troubles and find a new sales path, unveiled a new approach to retail banking compensation. The emphasis is on teamwork at the branch level, and the 2017 Wells employee handbook states that “teamw ork i s e s s ent i a l t o c r o s s s e l l”—a departure from Wells’ old culture. While banks may be holding mirrors up to themselves to see how well they oversee sales practices, they aren’t the only ones looking. Larger and mid-sized banks have had their sales practices subject to “horizontal reviews”—focused regulatory scrutiny in a single area—by both the Comptroller’s Office and the Consumer Financial Protection Bureau, plus similar attention from the Federal Reserve. In late November, CFPB published guidance to institutions on detecting and preventing consumer harm from sales incentives. In early January, Comptroller Tom Curry said during a press briefing on industry risks that his agency’s review— “to assess whether similar practices and weaknesses are occurring”—continues. An industry observer says the effort began with data gathering, but that the next round may involve targeted examiner visits. No specifics have been released thus far. (Results of horizontal


Banks can’t live without sales, but risks of sales programs demand careful management By Steve Cocheo, executive editor

reviews have sometimes been published, but sometimes not. Participants generally receive redacted findings, reflecting that data based on interaction with multiple banks is involved.) In the meantime, even as these exams continue, it’s taken as a given that more attention will be paid in all examinations to sales and incentive practices. Regulators have a proposal outstanding on incentive pay that has been hanging for over six months, and that could be hastened toward final form or become the basis of a wider rule. Institutions as small as $1 billion would be covered under its present form. Attention to cross-selling practices has already moved beyond banking proper. In October 2016, the Financial Industry Regulatory Authority began its review of incentives paid to broker-dealer firms’ employees to promote bank products of their parent organizations to brokerage customers, among other purposes.

Tone at the top and beyond As with many banking elements, experts say the board is where things begin—the classic “tone at the top” argument. “The regulators will hold the board of directors accountable given its responsibilities for overseeing that the bank’s revenue-generating strategies (e.g. sales targets) are in line with the bank’s risk appetite,” states a fall article in A Closer Look, a banking newsletter from PwC’s Financial Ser vices Regulator y Practice. “The chief risk officer should have ultimate responsibility over the enterprisewide sales practices risk management program and should report to the board’s risk committee regarding the program.” PwC’s article advises that “tone in the middle” should be in line with that from the top. The board may send a message, but others carry out the intent—or fail to: “At a minimum, middle managers should avoid undermining corporate values statements by overemphasizing sales generation or setting unreasonable sales targets. Going further, managers should punish bad actors for rule violations, and serve as a

role model to other employees by speaking out against conduct that could lead to customer mistreatment (and reward employees who similarly speak out).”

Oversight starts on front line In testimony about Wells last year, CFPB Director Richard Cordray concluded by speaking more generally: “As we have seen here . . . unchecked incentives and an unrealistic and uncaring culture of highpressure sales targets can lead to serious consumer harm. Incentive compensation structures are common in businesses, and they can motivate positive behavior. Yet companies need to pay close attention to their compliance monitoring systems in order to prevent violations of the law and abusive practices.” Cordray also said: “If sales targets and incentive compensation schemes are implemented in ways that threaten harm to consumers and lead to violations of law, then banks and other financial companies will be held accountable.” Looking at this from the perspective of a “three lines of defense” approach to compliance and risk management, accountability begins at home. The three lines of defense are in the business unit itself (“the front line”); functions such as compliance and risk management; and, finally, internal audit. It’s essential that consumers’ needs be the centerpiece of the selling process. If anything that isn’t a good fit is sold to them “in today’s UDAAP environment, that gets viewed as deceptive,” says Riese. The key line of defense is the one closest to customers, the front line, which should track adherence of employee performance to high expectations—after appropriately preparing them for the role. “Customer service is the front line of defense, with the second and third lines providing monitoring of complaints and control testing oversight,” says Riese. “But fundamentally, both sales success and compliance success begin with having good systems and good training in place.” PwC’s article says that the “key concern for the first line of defense will be making

sure that its sales targets and incentives do not encourage harmful behavior.” Inappropriate behavior and judgment errors can still occur, and that is where other lines of defense as well as specialized programs can help. Lyn Farrell, senior advisory board member at Treliant Risk Advisors, says two areas to watch closely are complaints from the public and whistle-blower filings. S p e c i f i c t y p e s o f c ompl a i nt s t o watch for are those arising under the Fair Credit Reporting Act. These concerns are usually routed from the credit reporting firms to banks when consumers spot unfamiliar accounts on their credit records. Farrell points out that this may be a red f lag that a fraudulent account has been unknowingly opened by an employee attempting to game the bank’s sales system. Someone in the bank receives those queries, and risk management should be in the loop. Farrell says that some banks deploy a best practice of “welcome calls” to new customers. These calls are made by another employee, typically in a call center, which gives them an opportunity to detect fraudulent new account activity. PwC, in its ar ticle, recommends a heav y stress on data gathering in the monitoring process. For example, one trip wire to set is the opening of multiple products, such as a second or even a third checking product opened within ten days of the first. Legitimate reasons could apply, but the repetition bears review. The bureau, in its guidance, stressed the importance of compliance management systems overall and in regard to sales incentive pay: “An entity’s CMS should ref lect the risk, nature, and significance of the incentive programs to which they apply. Accordingly, the strictest controls w ill be necessar y where incentives concern products and services less likely to benefit consumers or that have a higher potential to lead to consumer harm, reward outcomes that do not necessarily align w ith consumer interests, or implicate a significant proportion of employee compensation.” February/March 2017




P2P: Back in the game

With Zelle, banks are poised to reclaim person-to-person payment leadership in 2017 By John Ginovsky, contributing editor The study was derived from three surveys Javelin conducted last year, which included a random sample of 3,200 respondents in October, 10,639 in May, and 3,182 in July/August.

Enter Zelle



February/March 2017

P2P Market Sizing and Introduction of Real-Time Payments. “First, financial institutions will need to have higher adoption of P2P payment services in their mobile and online banking platforms to reach more consumers who may not be open to using a nonbank service, such as Venmo,” the report continues. “Second, there needs to be greater usability of funds within a P2P wallet, going beyond sending money to online and mobile commerce, whether through in-app payments or proximity payments. Finally, voice-based P2P payments must be enabled through digital assistants (e.g. Amazon’s Alexa) and emerging voice banking offerings by institutions.”

Venmo, PayPal’s “social payments platform,” processed $5.6 billion in fourthquarter 2016—up 126% year-over-year

Shutterstock/David M G


s the person-to-person payment environment continues to grow, 2017 could be the year when f inancial institutions mount a concerted effort to gain dominance in this area. A s t udy by Javel i n S t r at e g y a nd Research concludes that baby boomers and Gen Xers likely will join P2P’s current, most ardent users: millennials. The researchers predict that by 2021, at least half of U.S. consumers will conduct P2P through various channels. That would be up from one in three in 2016. In order to do that, however, financial institutions will need to step up and make P2P as easy to use as current nonbank providers, such as PayPal’s Venmo service. They may even have to take the service one or two steps forward from where it is now by developing secure personal assistant capabilities—in other words, voice-driven apps. “In order to achieve almost 50% consumer adoption, P2P pay ments w ill need to have greater availability within f inancial institution digital banking, higher usage w ithin mobile wa llet s (in-app payments and proximity payments), and, finally, voice-driven P2P services,” Javelin concludes in its study,

P a y P a l ’s Ve n m o , a l r e a d y s o l i d l y entrenched, is a formidable competitor. According to its latest financial statement, Venmo, described as the company’s “social payments platform,” processed $5.6 billion in total payment volume in fourth-quarter 2016, up 126% year-overyear. In all of 2016, Venmo processed $17.6 billion in payments. On the near horizon, however, looms the rollout of the Zelle P2P ser v ice, offered by Early Warning. More than 19 major financial institutions have signed on to this network, says Melissa Lowry, vice-president of marketing for Early Warning. She says it will go fully live sometime in the first half of 2017. Ja c k He n r y a nd A s s o c i a t e s I nc . entered into a strategic alliance with Early Warning to resell the Zelle Network to its 3,000 financial institution clients. Other processors partnering with Zelle are Fiserv, FIS, and Co-Op, putting the potential number of financial institutions that could offer it at 9,000, according to Lowry. “Early Warning’s announcement of Zelle, a real-time P2P service for banks, is a serious, competitive threat to Venmo and other nonbank P2P providers,” Javelin’s report notes. “It is an open network

and continues to sign up more banks and credit unions to regain P2P momentum among bank customers, particularly the heaviest users: millennials.”

P2P: What it is, and isn’t P2P needs to be disting uished from e-commerce. “P2P payments are typically social repay ments or informal business payments, such as to the piano teacher,” Michael Moeser, director of payments, Javelin Strategy and Research, and author of the report, told Banking Exchange. “It is an informal payment between two individuals that may take place through the transfer of cash, check, or increasingly digital means, such as through a bank service.” For example, Moeser says, a person may give a ride to a colleague in his personal car, if they agree to split the costs by the passenger reimbursing the driver. That would be a P2P transaction. But if the rider contracts with an Uber driver through the Uber app, that would constitute e-commerce, he says. The distinction is important. In 2016, P2P payments grew to more than $482 billion, up 27% from the year before, according to the Javelin study. “P2P payment volume has grown signif icantly because of increasing consumer demand to use digital money for informal bill payments (e.g. the babysitter), gifting, and repayment of social activities (e.g. lunch with a friend),” the report says. Unfortunately, Moeser says the exact portion of such “informal bill payments” relative to the total amount was not calculated in this study. “We just know that informal payments are rising as consumers report greater usage of P2P to pay babysitters, repay roommates, etc.,” he says.

Channel use varies The Javelin study does track both total usage and channel preferences. Overa ll, 69% of dig ita l P2P users, or 58 million people, use both PCs or laptops and mobile phones to send funds to other people, the study finds. However, of those who say they use only a single channel

Some 19 major banks have chosen Zelle’s open network to meet growing P2P demand. Success depends on ease of use and forward-thinking for P2P, 22 million use only PCs or laptops (26%) and 4 million say they only use mobile devices (5%). “Generally speaking, anything you can do on a PC/laptop you can do on a mobile phone,” Moeser says. “However, certain social situations will likely favor one channel over another.” More important than such on-the-spot exchanges, however, is the use of P2P to provide gifts. Men (41%) and women (40%) report that gifting is the most common reason they use P2P, the study says. “Gifting is so widely adopted because all generations, from millennials to baby boomers, use it,” the study concludes. This segues into two potential aspects of P2P as it continues to evolve: the social aspect it may present, and the possibility of providing voice-enabled payments. “After ease of use and pricing, men show a significantly stronger desire [than women] in the social features of P2P transactions, which are typically lacking from traditional bill payment P2P services offered by financial institutions,” the report says. Such features include the ability to request money, the ability to share P2P transactions on social media, and the ability to find Facebook friends to whom they want to send money. The Javelin report indicates, however, that charging for P2P payments will not be popular, unless additional services are offered to justify the fee. “Although some financial institutions today charge their customers a minor fee for sending P2P

payments, it is not a sustainable, longterm business model,” according to the report. Early Warning’s Lowry says that there will be no fees directly from Zelle, leaving pricing decisions up to individual financial institutions.

Voice will be big, but not yet There is voice-based potential. “As voicebased banking offerings expand over the next few years, P2P payments will become accessible to more consumers who normally would not have adopted them,” the study says. “ Voice -ba sed payments will be significantly easier to use and access from a wider variety of devices. This is especially true of older c on su mer s who wou ld not t h i n k of using Venmo and would prefer to use their financial institution’s P2P service.” Moeser tempers this somewhat. “We are still in early days on voice-based pay ments and bank ing, par ticularly since the secur it y elements of voice authentication have not been built out,” he explains. “The report indicates that companies like FIS are working on voice authentication to allow Alexa to do such transactions, but it’s not there yet.” Nevertheless, Moeser says consumers will expect voice-based payment support as part of the overall adoption of voicebased banking. “Go forward two to three years when we get self-driving cars and digital assistants are in many homes, the need for voice ba nk ing a nd voice payments will be strong.” February/March 2017



/ Compliance Watch /

Fair Lending’s next act

Emphasis, methods, and actors may evolve under Trump, but banks must maintain strong compliance efforts By Steve Cocheo, executive editor “Fair-lending enforcement will not go away,” says Paul Hancock, partner a t K & L G a t e s a n d a k e y pl ay e r a t DOJ in fa ir-lending enforcement dur ing the Clinton Administration. “Some legal theories may be of less int ere st t o t he new a d m inistrat ion tha n to prev ious ones,” says A na nd Raman, partner at Skadden, Arps, Slate, Meagher & Flom LLP. “But it’s important to realize that even with the change in administration, there’s been no change in the underlying laws, which have been on the books for some time.” The Equal Credit Opportunity Act has been law since 1974 and the Fair Housing Act since 1968. “I don’t think you’re going to see, in the short term, institutions take their feet off the pedal of fair-lending compliance,” maintains Raman.



February/March 2017

“Even with the change Looking at the players in administration, While DOJ is a central player to federal enforcement, and CFPB there’s been no change fair-lending ramped up its activity quickly in its short existence, prudential regulators play a in underlying laws, role. And other parties may step up which are on the books” key their activity in the wake of any actual or How deep will change go?

Andrew Sandler, chairman and executive partner at BuckleySandler LLP, is one of the most experienced attorneys in the fair-lending field. He notes that he is now seeing his sixth presidential transition, as an attorney, two from Democratic to Republican. Fair-lending enforcement ha s of ten gone t hrough evolut ions, but he points out that even under both Bush administrations, enforcement continued, even if at a slower pace and fewer Justice cases. In a Trump administration, Sandler says, DOJ “will probably be even less active, but enforcement won’t go away entirely.” Methods, interpretations, and leadership may change, but the law is the law. And even if fewer DOJ actions result, he says, enforcement attention will be seen from other quarters that had been less active during the Obama years.

perceived change in federal emphasis. Even as the presidential inauguration approached, the Obama DOJ kept up its pace. On Jan. 13, DOJ filed suit against K leinBank, charging it w ith redlining in its residential mortgage business. In a departure from most banks’ public stances—typically, fair-lending cases are settled—KleinBank said that it “vigorously disputes the government’s claim of ‘redlining,’ which has absolutely no basis in fact.” With a new attorney general in place, Sandler says it is reasonable to expect that the new head of the Justice Department’s Civil Rights Division, center for the department’s fair-lending activity, will be someone who opposes past policies. The future leadership of CFPB is hazy, but Sandler points out that Direct or R ic ha rd C ord r ay “ ha s t old t he troops that it’s business as usual until they shut the lights off.” Cordray said,



he industr y is coming of f eight years of increa sed and aggressive enforcement of fairlending laws, during which time a controversial legal theory—“disparate impact”—became a weapon of choice. A new player, the Consumer Financial Protection Bureau, joined the Department of Justice with a status not given t o t ra d it iona l, pr udent ia l ba n k i ng regulators—the ability to file its own fair-lending actions independent of DOJ. Redlining cases morphed to embrace new approaches. Indirect auto lending cases proceeded on the basis of a proxy method for determining loan applicants’ ethnicity in the absence of required government data-gathering requirements as used in mortgage lending. The industry may be inclined to anticipate some relief. However, ex per t s inter v iewed by Banking Exchange say that while some of what was seen during the Obama administration will likely change as Trump nominees as well as their appointed deputies take office, banks can’t let their guards down. Experts say that banks must continue to do all that they do now to ensure compliance with fair-lending laws and regulations.

post-inauguration, that major actions remained to be unveiled at CFPB, not indicating their subject matter. CFPB emphasis under a Trump appointee will change, with the nature and extent of that dependent on who gets the job. Both DOJ and CFPB have outstanding business, of course—cases that have been in the pipeline for some time. Andrea Mitchell, partner at BuckleySandler specializing in fair lending, UDA AP, and related issues, says that DOJ has clearly been exercising “triage” in reviewing its outstanding case load. Some matters have been accelerated—witness the KleinBank case—while others have been paused, and others apparently dropped, at least for now. Some types of pending cases have been difficult to read, Mitchell points out, because they are not hearing from their counterparts at DOJ, a possible signal that the Civil Rights Division is waiting to see how fair-lending priorities change. “Fair-lending enforcement is carried out by multiple organizations, which will be affected by various degrees by the change in administration,” says Raman. He predicts that staffs will take a hard look at pending cases, some of which have been on their plates for a couple of years. “I would hesitate to say that there will be a wholesale clearing out,” he adds.

“Permanent Washington”

One point experts interviewed agree on is that while leadership changes at the top, and that “tone at the top” is important to understand, another factor exists. This is the professional staffs of agencies, including DOJ, CFPB, and the Department of Housing and Urban Development, as well as the professional staffs at the traditional banking regulators. K&L Gates’ Hancock suggests that professional staff, protected by civil service laws, will have influence. “They will be subject to new guidance and priorities differing from past administrations,” he says, “but they’ll still argue for enforcement of civil rights laws.” An example of this has already shown itself, says Mitchell, in that the consumer

DOJ is exercising triage in reviewing its outstanding case load, with some matters accelerated, some dropped, and some paused, as DOJ awaits new developments —Andrea Mitchell, BuckleySandler protection sections of the traditional banking agencies have come to see themselves as “an overlay on the supervision and enforcement functions.” “They exercise more assertiveness and feel more empowerment” in fair-lending and other consumer protection matters, says Mitchell. For the time being, the leadership of the prudential regulators isn’t changing, and that leadership created that empowerment, she explains. At CFPB, Raman says, the announced program for enforcement in 2017 includes facets of fair lending, such as mortgage redlining, loan servicing, small business credit, and student lending, and, for the time being, that is the agenda. Consumer protection in such areas, Raman says, “tends to transcend party lines.” He expects no change in cases where c i rc u m st a nc e s appe a r t o be clear-cut. Even if CFPB saw a leadership change that led to emphasis on matters other than fair lending, there’s a wild card of sorts in the prudential regulatory agencies. The Dodd-Frank Act ushered in many changes in the roles of traditional regulators v is-à-v is CFPB. There’s a pent-up energy at the traditional players. “ The prudentials have been deferring to CFPB,” points out Sandler. “If

CFPB begins to do less in this area, the prudentials will step up their game on fair-lending matters.” Unlike CFPB, the traditional regulators must make referrals to DOJ for a suit to commence. However, there are other ways that bank regulators can exercise their authority in the fair-lending arena. Community Reinvestment Act evaluations, for example, include an element of fair-lending review.

New players in the wings?

So political leadership may not exercise complete control, whatever the official policies turn out to be. All this said, if the turnover in Washington does lead to a major change in federal fair-lending enforcement energy, that is still not the whole picture. Sandler says it is likely that state attorneys general, especially Democrat AGs, will step in and pick up the slack perceived at the federal level. “You’ll see a lot more AG activity,” he predicts. “Some states will be more aggressive than the federal government, though I wouldn’t suggest that the federal government won’t be aggressive,” says Hancock. Further, the quasi-public sector will also be watching, and acting, should federal activity fall off. Sandler suggests February/March 2017



/ compliance watch / that public-interest organizations, such as the Center for Responsible Lending and the National Community Reinvestment Coalition, could enter the legal fray directly. Sandler points out that such groups have been out raising money to fund litigation programs.

DC emphasis could change



February/March 2017

generals have pursued “classic” redlining. An issue that may be reviewed in this context is REMA. Reasonably Expected Market Area refers to an area that a regulator believes a bank can reasonably serve on the basis of its existing marketing and outreach, and can be defined outside of the bank’s own definition of its CRA assessment area. This concept has been used to examine performance in majority-minority areas. • Small business fair lending. Under Dodd-Frank, CFPB must implement a system of monitoring credit for small businesses, women-owned businesses, and minority-owned businesses. This is still pending, and it is expected to resemble Home Mortgage Disclosure Act reporting. Sandler believes the new administration’s players will continue to proceed w ith this ef for t. In fact, in a recent regulatory discussion she was part of, BuckleySandler’s Mitchell says she heard FDIC representatives suggest that tracking efforts in small business lending to women and minorities in tracts where banks may other w ise be accused of redlining could help mitigate regulatory concerns that banks are not serving the lending needs of those neighborhoods. Smaller banks have complained that they operate at a disadvantage to large institutions in majority-minority tracts. The large institutions can implement major lending initiatives, they say, obtaining much of the potential bankable credits. This leaves the smaller players unable to make loans that could enable them to

perform at federally expected levels. • Auto lending. Experts interviewed indicate that CFPB has already been moving away from its controversial proxy analysis. They say there has been recognition that the practice undermined enforcers’ credibility. • Statistical analysis. Both for banks attempting to monitor their fair-lending performance and for enforcers investigating their efforts, the statistician reigns as highly as the lawyer. The importance of knowing precisely how the bank is doing will continue, and banks must be prepared to continue spending on this activity. The government will continue to lean on such analysis, Mitchell says. However, she says it is possible that the federal government will engage in less aggressive interpretation of statistics.

What can a bank do now?

All interviewed agree that banks should do nothing to slack off on their efforts du r i ng t h i s p er io d of u nc er t a i nt y. In recent years, the importance of m a i n t a i n i n g a r o b u s t c o mp l i a n c e management system has been stressed in the face of increasing federal enforcement on all regulatory fronts. A shift in the federal center of fair lending underscores this expectation. “As CFPB potentially moves away from f a i r l e n d i n g ,” s a y s S a n d l e r, “a n d prudential regulators pick up more of the enforcement, the quality of a bank’s compliance management system will loom more importantly.”


Bankers will be watching to see how federal enforcement shifts, where it continues. A look at some specific matters: • Disparate impact. This legal theory has been ground zero for much criticism of enforcement in the Obama years. This expanded the traditional evaluation of disparate treatment—outright discrimination in lending—to encompass unintentional discriminatory effect on minorities or other protected groups. This legal theory does not require DOJ or private plaintiffs to prove intent to discriminate, only the apparent resulting discriminatory result. BuckleySandler w rote an analysis attacking this theory on behalf of the American Bankers Association in 2012. Yet, the theory has survived attempts to unseat it, culminating in the Supreme Cour t decision to uphold dispa rate impac t in the Texa s Depar tment of Housing and Community Affairs v. The Inclusive Communities Project, Inc. Sandler and others do not see disparate impact falling by the wayside, but taking on a minor role in enforcement at the federal level. He says the arguments made in the KleinBank complaint indicate that even DOJ acknowledges the limits the court placed on the usage of disparate impact. • Redlining cases. Originally, redlining cases hinged directly on market areas identif ied by the government, as specifically excluded by a lender in its marketing and other outreach and explicitly redlined by alleged policy. In recent years, this evolved into criticism of lenders whose lending in “majorityminority” census tracts did not match that in majority-white areas. (A majority-minority tract is one in which over 50% of residents are of a minority race, ethnicity, or national origin. Majoritywhite tracts are those where over 50% of residents are non-Hispanic whites.) K&L Gates’ Hancock suggests that this definition of redlining may not sit well with a Republican administration, though Republican-appointed attorney

/ idea exchange /

spare a “berkshare”?

Western Massachusetts’ local currency links banks to sustainable economy movement By Steve Cocheo, executive editor


assachusetts’ Berkshires mountain region enjoys spectacular views, glorious fall foliage, a notable farm-to-table food movement, and one more thing that similar regions don’t have: its own currency. BerkShares, the local currency, was introduced in 2006 by the Berkshiresbased Schumacher Center for a New Economics as a project in sustainable economics. Consumers and businesses can go to 16 branches of four community banks in the region to purchase or redeem BerkShares, a paper currency featuring local scenery and portraits of famous area figures. The one BerkShare note—an informal abbreviation is B$1— features a member of the Stockbridge Mohican tribe. Other denominations feature Norman Rockwell, civil rights leader W. E. B. Du Bois, Herman Melville, and Robyn Van En, a pioneer in the community supported agriculture movement.

How currency works

B e rk S h a r e s s e l l a t $0. 9 5 , but a r e accepted for $1.00 in value at over 400 area businesses. So $95 buys B$100. The intent is to keep capital in the Berkshires region. About B$134,600—equivalent to roughly $127,900—is circulating, says Alice Maggio, director of programs at the Schumacher Center. A total of B$1 million was initially produced by an area printer. BerkShares exist only as notes—federal law doesn’t permit private coinage—and thus far haven’t been brought into the digital world. “Paper is a strong part of BerkShares’ identity,” Maggio explains. Using the physical BerkShares, only accepted locally, “shows the decision regarding where you are spending it when you hand it over,” she says. Adopting a BerkShare debit card would add outside organizations that take processing fees, she adds, defeating the program’s purpose by removing money from the region.

Local money, local banks

Chuck Leach, president and CEO of $335 million-assets Lee Bank, says community banking is a strong tool for doing good for

You can buy ten of these 10 BerkShare notes, featuring Robyn Van En, a local ag movement pioneer, for $95—a built-in discount good at Berkshires-area sellers.

a local economy, and “BerkShares plays into that.” Lee has been involved in the program for several years. Tellers sell and redeem local currency. Each participating bank maintains a no-fee, noninterestbearing checking account for BerkShares. “By taking part, we’re putting a stake in the ground to say, ‘We’re here to support you,’” says Leach. Indeed, Maggio says that out-of-area merchants have never connected with BerkShares—their scope makes them a bad fit. But BerkShare holders can use B$s at a variety of merchants, many oriented toward food or dining. Also, local retailers are well represented. Each month, a company that accepts the currency is featured in an online article and radio spot. BerkShares taps into the “buy local” trend. “Locally owned businesses do a lot more for a local economy,” says Maggio, who grew up in the Berkshires and returned after college. Spending BerkShares underscores where the money goes.

BerkShare economy

Mag g io says mercha nt s c a n a ccept BerkShares as best f its their circumstances—customers essentially receive a 5% discount on their dollar-denominated prices. Some merchants may take them on a given day of the week. A tire center that participates, for example,

accepts local currency for labor charges (up to B$100), but not for tires because it can’t use BerkShares to buy inventory. Merchants accumulating BerkShares can spend them with other participating merchants, producing what Maggio calls the program’s “multiplier effect.” But when they need dollars, they can redeem BerkShares at any participating bank. Taking part requires some training and extra processing time at the banks. (Account holders can transact freely, but noncustomers must provide identification that satisfies Know Your Customer rules.) Each year, the BerkShares organization provides cooperating banks with a letter attesting to their aid for the Community Reinvestment Act file. Leach says this helped his bank in its CRA exams. “We wouldn’t be able to do what we do,” says Maggio, “without the banks’ participation.” For Leach, being involved with the currency is a natural. He says the bank’s markets are depopulating, and residents are getting older, so that growing his business means taking it from other players like large, nonlocal institutions. “We have to be market takers,” says Leach. The BerkShares program helps. “We like A lice’s whole approach,” maintains Leach. “She has brought home to the community that economies can be self-sustaining.” February/March 2017



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February/March 2017



/ CounterIntuitive /

better than you think

Notion that bank IT is a dinosaur with fintechs running circles around it is wrong By Bill Streeter, editor & publisher



February/March 2017

areas where bank IT could improve. “A huge lesson for banks is to throw out technology regularly and continuously rebuild,” says Miller. “Part of the reason bank technology has this reputation for being unwieldy is that bankers hold onto it like it’s a precious object.” As a result, bank reengineering projects become big and risky because the bank waited so long to change, Miller says. For banks in this position, there are two options (not counting doing nothing). One is a “big bang” or replacing technology entirely, and two is “refactoring” or changing the system in bits and pieces on the fly. DataArt has done both, according to Miller, and in some ways, the big bang approach is easier because it gets the job done at a lower cost. But he feels the incremental approach has a better chance of success at banks. Miller’s second recommendation for banks is to continually experiment with new technologies. In this, he regards the proliferation of “labs” within banks as a healthy trend. He offers one caveat: Don’t isolate labs as a separate entity. There’s more benefit from hosting them within the bank’s technology group.

“A lab is not a unit,” he says. “A lab is a culture, a way of thinking, which should infuse the traditional thinking.” He understands the desire to maximize freedom and creativity, but usually the result will be “us versus them” or “future versus the past”—neither of which is healthy. All this is overlaid on the reality that many banks outsource some or much of their technology development and processing. Miller points out that it isn’t companies that deliver solutions; it’s people. He says if a bank can assemble a better team of tech people internally, they should. “Many bankers overestimate the cost of technology and how difficult it is,” Miller maintains. “They are a little too eager to say, ‘We can never do that; we’re too small,’’’ he says, adding that if they can put together a group of five or ten smart people, they can do it. Miller acknowledges that “ten people in a garage will not replace core processing technology overnight; it’s a much bigger lift.” But small, innovative projects—automating credit application processes, creating new online services— are not expensive and can be impactful in terms of customer loyalty.

Shutterstock/David Crockett


ankers—particularly those in technology positions—are probably smiling at the headline above. Don’t get too comfortable, however. The picture is a little more nuanced. The headline and stor y ref lect the thoughts of Alexei Miller, managing director of DataArt, a 19-year-old technology consultancy and builder of proprietary systems, headquartered in New York with operations in Russia. About 42% of the f irm’s business is w ith f inancial services customers. Miller manages financial services in the United States. Miller says bank IT is not given enough credit, whereas “the whole start-up scene is romanticized beyond what it deserves.” Bankers and others in traditional enterprises tend to “race” between the “old and clunky” and the “new world.” This is counterproductive, he says, because it’s never one or the other. “I think this infatuation with the startup scene is getting a little out of hand,” he says. “I enjoy the dynamism of the fintech/start-up world,” he adds, “I don’t like the hype.” Bank tech people are “really good at preparing for complex scenarios,” says Miller. “ They are conditioned to the fact that there will always be changes in management, new regulation, new competitors, etc.,” so they design systems accordingly. Sometimes, they overengineer, he adds, “yet if they don’t get it right and get hit by regulators for a critical failure—end of story—the business runs on reputation. Fintechs, on the other hand,” he says, “construct the most probable scenario and ignore the complexity of the outside world.” As a business strategy, fast failure is great, notes Miller. As a bank technology strategy, it has to be moderated. It’s not okay, for example, to put into production a lending or deposit function and then discover a week later that it doesn’t work. In the general tech world, they’ll “pull a few all-nighters and fix it,” he says. “That is not going to f ly in banking with regulators at the gate.” Nevertheless, Miller points out several

Competitive intelligence for bankers

March 2015



The key to dealing with disruption, says TS Bank’s Josh Guttau: Do some disrupting yourself



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